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2 cities, very different CD rates

By Sheyna Steiner ·
Friday, November 16, 2012
Posted: 5 pm ET

In October, the worst city for certificate of deposit rates was Pittsburgh. The average one-year CD  yield was just 0.13 percent. Locking up your money with a five-year CD hardly yielded better results at 0.63 percent.

Conversely, the best place for CD rates was Houston, where the average one-year yield was 0.44 percent. The average five-year CD yield was 1.19 percent for the month, according to Bankrate data.

Rates in the top 25 markets across the country fell somewhere between those two extremes. Why is there so much variability in CD rates? To find out how CD rates are set, I asked Dan Geller, executive vice president of Market Rates Insight, a rate and research consultant to the financial industry.

It's based on internal and external factors, Geller says.

"The first and most relevant factor is the liquidity needs of the bank. This basically depends on the demand for lending. The bottom line is that higher loan demand causes higher interest rates on deposits because banks have to maintain a certain level of liquidity to support lending," he says.

Regulations require that banks keep a certain amount of cash or investments that are similar to cash on hand. If loan demand increases, the bank can lure in more deposits with higher interest rates.

The external factors include the socioeconomic demographics of the area.

"Maybe the population is younger, therefore they can take higher risk with their money or in the equity market. Generally, the older the population, the more risk averse they are. Generally speaking, older people will opt for FDIC-insured CDs. Even though the return is meager, it is safe," Geller says, referring to accounts backed by the Federal Deposit Insurance Corp.

Pittsburgh has a lower unemployment rate than the national average, according to the Bureau of Labor Statistics -- 6.7 percent in September compared to the nation's 7.8 percent that month. But apparently not too many loans are being made.

Do you have another explanation for the wide variability? What are CD rates like in your area?

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